Tax revision issues, 1976 (H.R. 10612)

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Title:
Tax revision issues, 1976 (H.R. 10612)
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12 v. : ; 24 cm.
Language:
English
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United States -- Congress. -- Joint Committee on Internal Revenue Taxation
United States -- Congress. -- Senate. -- Committee on Finance
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U.S. Govt. Print. Off.
Place of Publication:
Washington
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Taxation -- Law and legislation -- United States   ( lcsh )
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federal government publication   ( marcgt )
non-fiction   ( marcgt )

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Bibliography:
Includes bibliographical references.
General Note:
At head of title: Committee print.
Statement of Responsibility:
prepared for the use of the Committee on Finance by the staff of the Joint Committee on Internal Revenue Taxation, April 14, 1976.

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University of Florida
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aleph - 025878813
oclc - 02347319
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ddc - 343/.73/04
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Table of Contents
    Front Cover
        Page i
        Page ii
    Table of Contents
        Page iii
        Page iv
    Introduction, estate tax in general, and gross estate
        Page 1
        Page 2
    Taxable estate
        Page 3
    Rates of tax and credits against tax
        Page 4
        Page 5
    Estates of nonresident aliens
        Page 6
    Filing and payment
        Page 7
    Gift tax in general
        Page 8
    Gift tax base
        Page 9
    Deductions from gift tax base
        Page 10
    Computation of gift tax
        Page 11
    Other gift tax provisions and related income tax provisions
        Page 12
Full Text
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[COMMITTEE PRINT]


TAX REVISION ISSUES-1976
(H.R. 10612)




10


ESTATE AND GIFT TAX REVISION




PREPARED FOR THE USE OF THE

COMMITTEE ON FINANCE

BY THE STAFF OF THE


JOINT COMMITTEE ON INTE:
TAXATION


APRIL 23, 1976


U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1976


I
ft


70-022


ffCS-17-76





























CONTENTS

Page
Introduction
1. Estate Tax, in General-------------------------------------- 1
2. Gross Estate---------------------------------------------- 1
3. Taxable Estate------------------------------------------ 3
4. Rates of Tax and Credits Against Tax------------------------ 4
5. Estates of Nonresident Aliens------------------------------- 6
6. Filing and Payment---------------------------------------- 7
7. Gift Tax, in General--------------------------------------- 8
8. Gift Tax Base--------------------------------------------- 9
9. Deductions From Gift Tax Base----------------------------- 10
10. Computation of Gift Tax----------------------------------- 11
11. Other Gift Tax Provisions---------------------------------- 12
12. Related Income Tax Provisions------------------------------ 12
(M)



















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INTRODUCTION


This pamphlet is a summary of existing estate and gift tax pro-
visions. It is in part a summary and in part excerpts taken from "A
Guide to Federal Estate and Gift Taxation" (publication 448) pub-
lished by the Internal Revenue Service. This material is included
because members of the Finance Committee have indicated an interest
in possible modifications in estate and gift tax provisions. No attempt
is made to describe the issues involved here nor are there any House
provisions referred to since this was not a subject matter included
in the bill passed by the House (H.R. 10612).
Issues which have been discussed in connection with the estate and
gift taxes include possible increases in the specific estate tax exemp-
tion, substitution of credits for specific exemptions, provision for
special valuation or credits for farm properties, unification of the
estate and gift tax provisions, increasing the marital deduction limi-
tation above the flat 50 percent level, extending the time of payment
in the case of estates consisting primarily of farms and other
closely held businesses, dealing with tax avoidance through the use of
trusts and other similar devices to skip estate tax for one or more gen-
erations, and also the problem of the basis to be attributed to property
passing from the decedent for subsequent income tax transactions. If
the committee desires to go into this subject, subsequent pamphlets
will discuss the issues involved.

1. Estate Tax in General
The Federal estate tax, first enacted in 1916, to impose a tax on
the transfer of property owned by the decedent at his death, whether
it is transferred by will or pursuant to laws of intestacy. Unlike
an inheritance tax that is imposed on each beneficiary of the estate
and based on the size of the inheritance and the relationship of the
beneficiary to the decedent, the Federal estate tax is imposed on the
entire estate, which is primarily liable for its payment. However, if
the estate does not pay the tax, the beneficiaries of the estate are liable
for the tax to the extent of the value (at the time of the decedent's
death) of the property acquired by them.
During recent years, the estate tax has annually produced approx-
imately $4 billion in revenue. The revenue produced from the estate
tax during recent years represents approximately 2 percent of total
tax revenues.
2. Gross Estate
The starting point in computing the estate tax is to determine the
gross estate of the decedent. In general, for purposes of the estate tax,
property that is includible in the decedent's gross estate can be sepa-
rated into three categories: (1) property in which the decedent had an
interest at his death; (2) property transferred by the decedent before
his death, but to which he retained "strings", i.e., certain powers or
(1)







controls over the property until his death, and (3) property which was
property transferred within three years before the decedent's death
"in contemplation of death".
Property owned by the decedent
The first category of property that is includible in the decedent's
groi:s estate is property that was beneficially owned by the decedent
at the time of his death, and was transferred at his death by will or
by intestacy laws. This category includes real and personal, tangible
and intangible property, such as real estate, furniture, jewelry, stocks
and bonds, bank accounts, promissory notes, or other evidences of in-
debtedness that are owned by the decedent. The property need not be
owned solely by the decedent or owned "outright" by the decedent
to be included in his gross estate. For example, if the decedent has
an interest in property owned as tenants in common with others, the
value of his interest as a tenant in common is includible in his gross
estate. Property that the decedent owned at his death, but that could
not be transferred by his will or by the intestacy laws, such as a life
estate created by another, is not included in the decedent's gross estate.
Special rules require the inclusion of certain annuities, joint inter-
ests with the right of survivorship, powers of appointment, and life
insurance proceeds transferred to a beneficiary or co-owner by reason
of the decedent's death through operation of law or contract even if
the interests are not transferred by will or pursuant to laws of
intestacy.
Property transferred by the decedent with "strings" attached
The second category of property includible in a decedent's gross
estate is property that was transferred by the decedent during his life-
time but with "strings" attached to the property (which were not
relinquished until the decedent's death). The value of the gross estate
includes property transferred by the decedent if he reserved certain
rights or interests in the property for his life (or for a period which
does not in fact end before his death). This provision applies to prop-
erty transferred by a decedent with a retained life estate or with a
retained right to designate persons who may possess, enjoy, or receive
income from the transferred property. In addition, the gross estate
generally includes the value of property transferred by the decedent if
he retained a reversionary interest. This provision applies if possession
or enjoyment of the property by the beneficiaries can be obtained only
by surviving the decedent and if the value of the reversionary interest
at the decedent's death exceeded 5 percent of the value of the property.
Finally, the gross estate includes the value of property transferred
during the decedent's life if the decedent retained the power to revoke,
alter, amend, or terminate the transfer. This provision applies if the
retained power was possessed by the decedent at his death. Property
is not included in the decedent's gross estate under this provision if
the exercise of the power is subject to a contingency beyond the dece-
dent's control which did not occur before his death.
Property transfcrrced in contemplation of death
The third category of property includible in a decedent's gross
estate is property that was transferred in contemplation of death. This
provision applies to property transferred by a decedent within the
-3year period preceding his death if the transfer is made in contempla-
tion of death. A transfer made within 3 years of death is presumed







to be made in contemplation of death unless the absence of a death-
related motive is established.
Valuation
Once it is established that a particular property is included in the
decedent's gross estate, the value of the property must be determined.
The value included in the gross estate is the fair market value of the
property interest at the date of death or, if the alternate valuation date
is elected, at the date six months after the decedent's death. For this
purpose, the term "fair market value" is the price at which the prop-
erty would change hands between a willing buyer and a willing seller.
neither being under any compulsion to buy or sell and both having
reasonable knowledge of all relevant facts.

3. Taxable Estate
The taxable estate is determined b--L dedCiucting from the gross estate
the deductible amounts for administration and funeral expenses,
claims against the estate, certain casualty and theft losses sustained
during adminiistration of the estate, the marital deduction, the charita-
ble deduct ion, and the specific exemption of $60,000.
AdmnzThistration expe,2 cs, funeral expenses and claims
Generally, a deduction is allowed for amounts payable for funeral
expenses, administration expenses incurred in administering the
estate, claims against the estate, and unpaid mortgages and charges
against, property included in the gross e.:tate. Administration expenses
include commissions of the executor or administrator, attorneys' fees,
and miscellaneous costs such as accountants' fees, court costs, and sell-
ing expenses. Claims against the estate include property taxes accrued
before the decedent's death, unpaid income taxes, and unpaid gift
taxes on gifts made by the decedent in his lifetime. Deductible claims
against a decedent's estate are only for enforceable personal obliga-
tions of the decedent. at the time of his death. Claims against prop-
erty for which the decedent was not personally liable may be taken
into account in determining the value of the property incluhdible in
the decedent's gross estate. No deduction is allowed from the gross
estate for expenses claimed for income tax purposes.
Casualty or theft losses
Deductions are allowed for losses incurred during the settlement of
the estate arising from theft or casualties, such as storms, fires, etc.,
but only to the extent that these losses are not compensated for by
insurance or otherwise. No deduction is allowed from the gross. estate
for losses claimed for income tax purposes.
Martial deduction
A deduction is allowed, subject to certain limitations, for the value
of any property interest included in the gross estate that passes from
the decedent to his surviving spouse. The intended purpose of pro-
viding the marital deduction was to provide some degree of parity
between common law property and community property. Since only
one-half of community property is included in a decedent's grozs estate
as property owned by him, the decedent's share of the community
property passing to the surviving spouse does not qualify for the








marital deduction. In the case of other property passing to a surviving
spouse, the allowable marital deduction is limited to the lesser of the
value of the property or fifty percent of the adjusted gross estate (the
gross estate less deductions for expenses, indebtedness, taxes, and
losses). An interest in property passing to the surviving spouse gen-
erally does not qualify for the marital deduction if it is a "terminable"
interest. A terminable interest is one that will terminate or fail after
the passage of time, or upon the occurrence or nonoccurrence of some
contingency. Examples of terminable interests are: life estates, annu-
ities, estates for a term of years, and patents.
Charitable deduction
A deduction is allowed for the value of property in the decedent's
gross estate that was transferred by the decedent to certain qualified
charitable recipients. The charitable deduction is unlimited in that
it is not subject to percentage limitations such as those that apply
with respect to the income tax deduction for contributions to both
domestic and foreign qualified charitable recipients.'
A charitable deduction is allowed for a charitable interest in trust
with remainder to a noncharitable entity, but only if the trust is in the
form of a guaranteed annuity or is a fixed percentage of the property,
valued and distributed annually. The allowable deduction is the value
of the income interest. In addition, a charitable deduction is allowed
for certain future interests in property given to a charity. However,
the future interest (except for a future interest in a personal residence
or a farm) must be in the form of a charitable remainder annuity
trust, a charitable remainder unitrust, or a pooled income fund.
Exemption
A specific exemption of $60,000 is allowed for the estate of each.
U.S. citizen or resident.
The exemption was first set. at $50,000 under the Revenue Act of
1916. The exemption was increased from $50.000 to $100,000 in 1924.
In 1932, an additional estate tax was imposed. The exemption from
the basic tax was retained at $100,000 but the exemption from the
additional tax was set at only $50,000. The exemption from the addi-
tional estate tax was reduced to $40,000 in 1935. The exemption from
the additional tax was raised to the present $60,000 amount in 1942.
In 1954, the basic tax and the additional tax were combined into one
schedule, with a $60,000 specific exemption.
4. Rates of Tax and Credits Against Tax

The gross amount of estate tax imposed is determined by applying
the appropriate tax rates to the taxable estate. The estate tax rates
are progressive and range from 3 percent for the first $5,000 to 77
percent for amounts in excess of $10,000,000.
The net estate tax payable is determined by deducting from the
gross estate tax the allowable credits for State death taxes. Federal
gift taxes, Federal estate taxes on prior transfers, and foreign death
taxes.
I In general. for purnooses of the Income tnx. a deduction for charitable contribution is
limited to 20 percent of the taxpayer's adjusted gross income In the case of contributions
to private foundations (other than private operating foundations) and to 50 percent of
the taxpayer's adjusted gross income in the case of contributions to qualified charitable
recipients other than private nonoperating foundations.









Rates of tax
The present rates of tax are set forth in the following table:

TABLE FOR COMPUTATION OF GROSS ESTATE TAX

Percentage rate of tax on
Taxable estate equal to or Taxable estate less Tax on amount in column (A) excess over amount in col-
more than- than- umn (A)
(A) (B) (C) (D)

0 $5,000 0 3
$5,000 10,000 $150 7
10,000 20,000 500 11
20,000 30,000 1,600 14
30,000 40,000 3,000 18
40,000 50,000 4,800 22
50,000 60,000 7,000 25
60,000 -100,000 9,500 28
100,000 250,000 20,700 30
250,000 500,000 65,700 32
500,000 750,000 145,700 35
750,000 1,000,000 233,200 37
1,000, 000 1,250,000 325,700 39
1.250,000 1,500,000 423,200 42
1,500,000 2,000,000 528,200 45
2,000, 000 2,500,000 753,200 49
2,500,000 3,000,000 998,200 53
3,000,000 3,500,000 1,263,200 56
3,500,000 4,000,000 1,543,200 59
4,000,000 5,000,000 1,838,200 63
5,000,000 6,000,000 2,468,200 67
6,000,000 7,000,000 3,138,200 70
7,000,000 8,000,000 3,838,200 73
8,000,000 10,000,000 4,568,200 76
10,000,000 ---- 6,088,200 77


Credit for State death taxes
A limited credit is allowed against the gross estate tax for the
amount of any estate, inheritance, legacy, or succession taxes actually
paid to any 'State on account of property included in the gross estate.
State death taxes will qualify for the credit only if actually paid by
the later of four years after the filing of the estate tax return or before
the expiration of any extension of time for the payment of the Federal
estate tax because of undue hardship.
Credit for gift taxes
Credit is allowed against the estate tax for the Federal gift tax paid
on a gift by the decedent of property subsequently included in his
gross estate (e.g., property that was transferred in contemplation
of death). The credit is allowable even though the gift tax is paid
after the decedent's death and the amount of the gift tax is deducted
from the gross estate as a debt of the decedent.
The credit is limited to the lesser of the following two amounts:
(a) The gift tax paid on the gift that is included in the gross
estate, or
(b) The amount of estate tax attributable to the inclusion of the
gift in the decedent's gross estate.
Credit for foreign death taxes
Credit is allowed against the estate tax for any estate, inheritance,
legacy, or succession taxes actually paid to any foreign country. The
term "foreign country" for this purpose includes possessions of the
United States.







The credit is allowed for death taxes paid with respect to property
(1) situated within the foreign country to which the tax is paid, and
(2) included in the decedent's gross estate. No credit is allowed for such
taxes paid with respect to the estate of a person other than the dece-
dent. No credit is allowed for interest or penalties paid in connection
with foreign death taxes.
The credit is limited to the smaller of the following:
(a) The amount of the foreign death tax attributable to the prop-
ertv situated in the country imposing the tax and included in the
decedent's gross estate for Federal estate tax purposes, or
(b) The amount of the Federal estate tax attributable to particular
property situated in a foreign country, subject to the death tax in that
country, and included in the decedent's gross estate for Federal estate
tax purposes.
Credit for tax on prior transfers
Credit is allowed against the tax for Federal estate taxes paid on
the transfer of property to the present decedent from a transferor who
died within 10 years before, or within 2 years after, the present dece-
dent's death. It is not necessary that the transferred property be identi-
fied in the present decedent's estate or that it be in existence at the time
of his death. It is sufficient that the transfer of the property was sub-
ject to Federal estate tax in the estate of the transferor and that the
transferor died within the prescribed period of time.
The credit is limited to the smaller of the following amounts:
(a) The amount of the Federal estate tax attributable to the trans-
ferred property in the transferor's estate, or
(b) the amount of the Federal estate tax attributable to the trans-
ferred property in the present decedent's estate.
If the transferor died within 2 years before, or 2 years after, the
present decedent's death, the credit is the smaller of limitation (a)
or (b) above. If the transferor died more than 2 years before the dece-
dent, the credit is a certain percentage of the smaller of (a) or (b)
as follows:
(1) 80 percent, if the transferor diedwithin the third or fourth
yea r preceding the decedent's death;
(2) 60 percent, if within the fifth or sixth year;
(3) 40 percent, if within the seventh or eighth year;
(4) 20 percent, if within the ninth or tenth year.

5. Estates of Nonresident Aliens
In the case of a nonresident alien, only that part of the gross estate
that is situated in the United States is subject to tax. Generally, a
specific exemption of $30,000 is provided. A proportion of the
expenses, indebtedness, taxes, and losses is allowed as a deduction. The
proportion allowable is based on the ratio of the value of property
situated in the United States to the value of all property in the dece-
dent's estate. Generally, a charitable deduction is allowable for be-
quests to domestic charities. Unless specifically provided for under a
death tax convention, no marital deduction is available.
The tax rates applicable to an estate of a nonresident alien
range from 5 percent for the first $100,000 in the taxable estate to
25 percent on amounts in excess of $2,000,000. The credits allowable







for State death taxes, gift tax, and tax on prior transfers a re allow-
able inthe case of the estate of a nonresident alien.
6. Filing and Payment
Filing requirements
In the case of the estate of a citizen or resident of the United States,
an estate tax return must be filed by the executor or administrator if
the value of the gross estate was in excess of $GO,000 on the date of the
decedent's death. In the case of a nonresident not a citizen of the
United States, an estate tax return must be filed if the portion of the
decedent's gross estate situated in the United States was in excess of
$30.000 on the date of death.
The estate tax return, if required, must be filed within 9 months
a after the date of the decedent's death. The Secreta ry of the Treasury or
his delegate is authorized to grant an extension of time for filing the
return upon request and upon a showing of good and sufficient cause.
However, no extension can be granted for more than 6 months from
the due date of the return unless the person liable for filing the tax is
abroad. In addition, an extension of time for filing the return does not
extend the time for payment of the tax.
Payment of tax
The estate tax is due and payable on the due date for filing the
estate tax return, i.e., 9 months after the date of the decedent's death.
There are four provisions under which an extension of time for pay-
ment of all or a portion of the estate tax may be granted, relating to
reasonable cause, undue hardship, a nonpossessory reversionary or
remainder interest, and certain closely held businesses.
An executor or administrator may request an extension of time for
paying the estate tax for a period not to exceed 12 months from the
date fixed for the payment and such a request will be granted when-
ever there is reasonable cause. An extension of time to pay does not
extend the time for filing the return. Reasonable cause is not limited
to a showing of "undue hardship." It includes cases in which the
executor or administrator is unable to readily marshal liquid assets
because they are located in several jurisdictions; or the estate consists
largely of assets in the form of payments to be received in the
future, such as annuities, copyright royalties, contingent fees, or ac-
counts receivable; or the assets that must be liquidated to pay the
estate tax must be sold at a sacrifice or in a depressed market.
If the payment, on the due date, of any part of the tax shown on
the return would impose undue hardship upon the estate, the time for
payment may be extended for a period or periods not to exceed one
year for any one period, up to a total of not more than 10 yeaIrs from
the due date. The term "undue hardship" means more than just an
inconvenience to the estate; therefore, an extension will not be granted
on the basis of a general statement alleging hardship. However, the
necessity for selling an interest in a family business that is included
in the gross estate to people not related to the family, would be an
undue hardship even though a price equal to the current fair market
value could be realized.







Payment of the tax attributable to the inclusion in the gross estate
of an interest in a closely held business, under certain conditions, and
at the election of the executor, may be made in not more than 10
yearly installments, the first to be paid on or before the date otherwise
fixed for the payment of the entire tax. The election by the executor
may not be made later than the date fixed for the filing of the return
(including extensions). This provision of the law is available only
if the value of the interest in the closely held business exceeds 35
percent of the value of the gross estate or 50 percent of the taxable
estate of the decedent. For purposes of this provision, the term "inter-
est in a closely held business" means an interest as sole proprietor in
a trade or business; an interest as a partner in a partnership having
not more than 10 partners, or in which the decedent owned 20 percent
or more of the capital; or ownership of stock in a corporation having.
not more than 10 shareholders, or in which the decedent owned 20 per-
cent or more of the voting stock. The benefit of this provision of the
law is available only to estates of decedents who, at time of death, were
citizens or residents of the United States.
If an extension of time to pay the tax is granted because payment
on the due date would cause undue hardship to the estate, or the exec-
utor elects to pay in installments the portion of the tax attributable
to an interest. in a closely held business, the Internal Revenue Service
may, if it deems necessary, require the executor to furnish a bond for
the payment of the tax in an amount not more than double the tax
for which the extension is granted.
Interest on extended payments
With respect to extensions of time for payment under the undue
hardship or closely held business provisions, interest at the rate of
4 percent per annum was imposed on amounts outstanding before
July 1, 1975. However, interest at the general rate prescribed under
the Code is imposed on amounts outstanding on or after July 1, 1975,
for any extension of time for payment. Generally, the interest rate
under this provision is adjusted annually effective as of the first of
February to reflect 90 percent of the average predominant prime rate
charged by commercial banks to large business during September of
the preceding year. This rate is currently 7 percent per annum.

7. Gift Tax, in General
The Federal gift tax is imposed upon the transfer of property by
gift. It is imposed upon the person making the gift (donor). If, how-
ever, he does not pay the tax when due, the person receiving the gift
(donee) may be called upon to pay it, to the extent of the value of the
property received by him.
The gift tax is not imposed upon the receipt of property but rather
upon the donor's act of making the transfer. The tax is measured by
the value of the property transferred during the calendar quarter,
provided the transfer results in a completed gift. Whether a gift is
considered complete depends upon all the facts in a particular case.








8. Gift Tax Base
The total amount of gross gifts made by a donor during any calen-
dar quarter is determined by adding the fair market value of all his
gifts for the calendar quarter.
If the donor is married and both spouses consent to split their gifts
for the quarter, his total amount of gross gifts is equal to one-half the
value of his gifts to people other than his wife, plus one-half the value
of her gifts to people other than him, plus the full value of all gifts he
made to her during the calendar quarter. Her total amount of gross
gifts for the quarter would be the same except that instead of includ-
ing gifts he made to her, she would include the full value of gifts
she made to him.
The total amount of net gifts made by a donor during any calendar
quarter is the amount of gross gifts less any applicable $3,000 annual
exclusion per donee still available to him.
The total taxable gifts made by a donor for the quarter is the total
amount of net gifts less (1) one-half the value of any gifts that qualify
for the marital deduction; (2) the full value of any gifts that qualify
for the charitable deduction; and (3) any portion of his $30,000 spe-
cific lifetime exemption that may still remain. (The specific exemption
cannot exceed $30,000 for this computation, even if some of the gifts
were made during periods when the specific exemption was greater
than $30,000.)
Gift by husband or wife to third party (gift splitting)
SA gift made by a person to someone other than his spouse may be
considered, for Federal gift tax purposes, as having been made one-
half by each spouse. For example, if Mr. A gives $16,000 to his son,
the gift will, with Mrs. A's consent, be considered $8,000 from Mr. A
and $8,000 from Mrs. A. To "split the gift," the spouses must be legally
married to each other at the time of the gift. If they divorce each other
later in the calendar quarter, they may still split the gift so long as
neither marries anyone else during that quarter. They both must
signify on their separate gift tax returns their consent to have all gifts
made in that calendar quarter split between them. In addition, both
must be citizens or residents of the United States on the date of the gift
and one spouse may not create a general power of appointment over
the property transferred in the other spouse.
Annual exclusion
The first $3,000 of gifts (except gifts of future interest in property)
made to any one person during any calendar year is excluded in deter-
mining the total amount of gifts for the calendar quarter. This $3,000
annual exclusion is applied to all gifts of a present interest made
during the calendar year in the order in which they were made until
the $3,000 exclusion per person is exhausted. For a gift in trust, each
beneficiary of the trust is treated as a separate person for purposes of
the $3,000 exclusion. However, the $3,000 exclusion is not available
for gifts of a future interest, such as a remainder interest in a trust.
The entire value of such a gift must be included in the total amount
of gifts for the calendar quarter in which the gift was made.







Specific exemption
The tax applies to the total taxable gifts. The amount of the tax-
aible gifts is arrived at by deducting from the total amount of gifts
during the calendar quarter (gross gifts less applicable $3,000 ex-
clusions) the specific exemption and the charitable and marital
deductions.
A lifetime exemption of $30,000 is allowed. At the option of the
donor, the exemption may be taken in the full amount in a single
calendar quarter, or it maybe spread over a period of quarters or years
in any amounts that he chooses. No further exemption may be taken
after the total amount of $30,000 has been used. In the case where a
husband and wife elect to split gifts as being one-half from each,the
specific exemption is in effect $60,000 ($30,000 for each).
Valuation of property
The value of a gift is the fair market value of the property given on
the date the gift is made. There is no alternate valuation date for the
Federal gift tax as there is for the Federal estate tax."
The "fair market value" is the price at which the property would
change'hands between a willing buyer and a willing seller, neither
being under any compulsion to buy or to sell, and both having reason-
able knowledge of all relevant facts.

9. Deductions From Gift Tax Base
Charitable deduction
A deduction is allowable for gifts to certain qualified charitable
recipients. The charitable deduction is unlimited in that it is not sub-
ject to percentage limitations such as those applicable to the income tax
deduction for charitable contributions. The deduction is not limited to
gifts for use within the United States, but is also allowed for gifts to
or for the use of qualified foreign charities.
A charitable deduction is allowed for a charitable interest in trust
with remainder to a noncharitable entity, but only if the trust is in the
form of a guaranteed annuity or is a fixed percentage of the property,
valued and distributed annually. The allowable deduction is the value
of the income interest.
A charitable deduction will be allowed for certain future interests
in property given to a charity. The future interest (except for a future
interest in a personal residence or farm) must be in the form of a
charitable remainder annuity trust or a charitable remainder unitrust
or a pooled income fund. Any other form of charitable remainder
interest generally will not qualify for the charitable deduction.
Marital deduction
Subject to certain limitations and conditions, a deduction is allowed
for one-half the value of any property interest transferred by gift to
a person who, at the time of the gift, was the donor's spouse. The de-
duction may not exceed the amount of gifts to the spouse less the
allowable annual exclusion. This means that the marital deduction
is equal to the lesser of:
(1) One-half the gift to the spouse before deducting the allow-
able annual exclusion; or
(2) The full amount of the gift after the allowable annual
exclusion.




UNIVERSITY OF FLORIDA

111111111111 1 1 1
11 3 1262 07125 7223

Certain property interests, called "terminable interests," that are
given to the spouse may not qualify for a marital deduction. A termin-
able interest is one that will terminate or fail after the passage of time
or when some contingency occurs or some event fails to occur. Ex-
amples of terminable interests are: life estates, annuities, estates for
a term of years, and patents. A terminable interest will not qualify
for the marital deduction if a reversionary or remainder interest in
the property is given for less than adequate consideration to any per-
son other than the donee spouse and such other person may possess or
enjoy any part of the property after the termination of the donee
spouse's interest. As in the case of the estate tax marital deduction,
transfers of community property to a spouse do not qualify for the
gift tax marital deduction.

10. Computation of Gift Tax

The tax liability is computed by adding together total taxable gifts
for the current quarter plus taxable gifts made in all prior years
beginning in 1932 and in all prior quarters beginning with the first
quarter of 1971, applying to the results the rates of tax contained in
the table below. The resulting tax is then reduced by the Federal gift
taxes previously paid (or that should have been paid) under that rate
schedule and the remainder is the gift tax liability due for the calendar
quarter.
The gift tax rates are progressive and range from 21/ percent for
the first $5,000 in cumulative taxable gifts to 573/4 percent for cum-
ulative taxable gifts of $10,000,000. The gift tax rates are set at three-
fourths of the estate tax at each corresponding rate bracket.
The rates of tax are set forth in the following table:

Amount of taxable gifts equal Amount of taxable gifts Tax on amount in column Percentage rate of tax"'on
to or more than- less than- (A) excess over amountlin
column (A)
(A) (B) (C) (D)

0 $5,000 0 2
$5,000 10,000 $112.50 54
10,000 20, 000 375.00 80
20,000 30, 000 1,200.00 10Y
30,000 40,000 2,250.00 13M
40,000 50,000 3,600.00 16Y2
50,000 60,000 5,250.00 18%
60, 000 100,000 7,125.00 21
100,000 250,000 15,525.00 22%
250,000 500,000 49,275.00 24
500,000 750,000 109,275.00 264
750,000 1,000,000 174, 900.00 274
1,00,000 1,250,000 244,275.00 294
1,250,000 1,500,000 317,400.00 31%
1,500,000 2,000,000 396,150.00 334
2,000,000 2,500,000 564, 900.00 364
2,500,000 3,000,000 748,650.00 39%
3,000,000 3,500,000 947,400.00 42
3,500,000 4,000,000 1,157,400.00 44Y
4,000,000 5,000,000 1,378,650.00 474
5,000,000 6,000,000 1,851,150.00 50o4
6,000,000 7,000,000 2,353,650.00 52%
7, 000,000 8,000,000 2, 878,650.00 54%
8,000, 000 10,000,000 3, 426,150.00 57
10,000,000 4, 566,150.00 57%





12


11. Other Gift Tax Provisions
Filing requirements
A Federal gift tax return, if required, is due on or before the 15th
day of the second month following the close of the calendar quarter
in which a gift is made.
A return is not required for any gift of a present interest to any one
person if the total gifts of present interests to that person for the
calendar year do not exceed $3,000.
Any gift of a future interest must be reported on a gift tax return
for the quarter in which the gift is made, regardless of the amount
of the gift.
Gifts by nonresident aliens
Gifts by nonresident aliens are subject to the Federal gift tax only
if the gifts involve real property or tangible personal property situated
in the United States.
The $3,000 annual exclusion is available to nonresident alien donors.
The specific lifetime exemption of $30,000 is available only if provided
under an applicable convention. A deduction is allowable for gifts to
both domestic and foreign charities by nonresident aliens, subject to
the same rules applicable to residents or citizens. The marital deduc-
tion is not available to a nonresident alien donor.
12. Related Income Tax Provisions
Under the income tax provisions, transfers of property by gift or
by reason of death do not generally result in the recognition of gain
by the donor or decedent, as the case may be, since such transfers are
not treated as sales or exchanges. An exception to this general rule is
made with respect to appreciated property contributed to a political
party. In this case, the appreciation attributable to the property is
recognized by the transferor (sec. 84).
With respect to the income tax treatment of the transferee, exclu-
sions are provided for proceeds of life insurance (sec. 101(a)), em-
ployee death benefits up to $5,000 paid by an employer (sec. 101 (b)),
and gifts and inheritances (sec. 102). In the case of gift transfers, the
donee's'basis for determining gain from the sale or exchange of the
property is generally a carryover basis from the donor, i.e., the donor's
basis plus the gift tax attributable to the transfer. In the case of
appreciated property transferred by reason of death, the beneficiary's
basis is-generally stepped-up to the valuation used for estate tax pur-
poses. Certain exceptions to this general rule are provided. The de-
cedent's beneficiary does not get a stepped-up basis for property or
property rights which is treated as "income in respect of a decedent."
This treatment would apply to property or property rights such as
uinpaid compensation earned by a cash basis taxpayer at his death and
gains from sales which had been entered into before death but not yet
consummated at death. Similar treatment applies to joint and sur-
vivor annuities, certain qualified stock options, installment obligations,
aand partnership interests so that the tax treatment which would have
applied to the decedent if he had lived to receive the income is carried
over to the estate, beneficiary, or successor in interest in a partnership
(secs. 72, 421(c), 453(d) (3), and 753).